Tag Archives: investment advice

Why Income Inequality Is a Drag On Economies

money mazeMy Comments: I’ve written before that it’s my belief that at some point, if income inequality between the haves and the have nots gets too large, social chaos will follow. The spread or relative level of spendable income between these two groups is continuing to widen. So it becomes just a matter of time until national leadership makes an effort to reverse the trend, or we as a people will make it happen. And it probably won’t be pretty.

Now I find there is a current economic cost for this inequality. Which means that to some extent a cost is being paid today by all of us, you and I and our families. It’s not somewhere down the road, it’s NOW. If this concerns you, you should make your concerns known.

By Martin Wolf / September 30, 2014

Big divides in wealth and power have hollowed out republics before and could do so again

The US – both the most important high-income economy and in many respects, the most unequal – is providing a test bed for the economic impact of inequality. The results are worrying.

This realisation has now spread to institutions that would not normally be accused of socialism. A report written by the chief US economist of Standard & Poor’s, and another from Morgan Stanley, agree that inequality is not only rising but having damaging effects on the US economy.

According to the Federal Reserve, the upper 3 per cent of the income distribution received 30.5 per cent of total incomes in 2013. The next 7 per cent received just 16.8 per cent. This left barely over half of total incomes to the remaining 90 per cent. The upper 3 per cent was also the only group to have enjoyed a rising share in incomes since the early 1990s. Since 2010, median family incomes fell, while the mean rose. Inequality keeps rising. The Morgan Stanley study lists among causes of the rise in inequality: the growing proportion of poorly paid and insecure low-skilled jobs; the rising wage premium for educated people; and the fact that tax and spending policies are less redistributive than they used to be a few decades ago.

Thus, in 2012, says the Organisation for Economic Co-operation and Development, the US ranked highest among the high-income countries in the share of relatively low-paying jobs. Moreover, the bottom quintile of the income distribution received only 36 per cent of federal transfer payments in 2010, down from 54 per cent in 1979.

Regressive payroll taxes, which cost the poor proportionally more than the rich, are projected to raise 32 per cent of federal revenue in fiscal year 2015, against 46 per cent for federal income tax, the burden of which falls more on higher earners.

Also important are huge increases in the relative pay of executives, together with the shift in incomes from labour to capital. The Federal Reserve’s policies have also benefited the relatively well off; it is trying to raise the prices of assets which are overwhelmingly owned by the rich. These reports bring out two economic consequences of rising inequality: weak demand and lagging progress in raising educational levels.

The argument on demand is that, up to the time of the crisis, many of those who were not enjoying rising real incomes borrowed instead. Rising house prices made this possible. By late 2007, debt peaked at 135 per cent of disposable incomes.

Then came the crash. Left with huge debts and unable to borrow more, people on low incomes have been forced to spend less. Withdrawal of mortgage equity, financed by borrowing, has collapsed. The result has been an exceptionally weak recovery of consumption.

It makes no sense to lend recklessly to those who cannot afford it. Yet this suggests that the economy will not become buoyant again without a redistribution of income towards spenders or the emergence of another source of demand. Unfortunately, it is not at all clear what the latter might be. Government spending is constrained. Business investment is curbed by weak prospective growth of demand. It is also unlikely to be net exports: everybody else wants export-led growth, too.

American education has also deteriorated. It is the only high-income country whose 25-34 year olds are no better educated than its 55-64 year olds. This is partly because other countries have caught up on the US, which pioneered mass college education. It is also because children from poor backgrounds are handicapped in completing college.

The S&P report notes that for the poorest households college graduation rates increased by only about 4 percentage points between the generation born in the early 1960s and that born in the early 1980s. The graduation rate for the wealthiest households increased by almost 20 percentage points over the same period. Yet, without a college degree, the chances of upward mobility are now quite limited. As a result, children of prosperous families are likely to stay well-off and children of poor families likely to remain poor.

This is not just a problem for those whose talents are not fulfilled. The failure to raise educational standards is also likely to impair the economy’s longer-term success. Some of the returns to education may just be the reward to obtaining a positional good: the educated do better because they have won a zero-sum race. Yet a better educated population would also raise everybody to a higher level of prosperity.

The costs to society of rising inequality go further. To my mind, the greatest costs are the erosion of the republican ideal of shared citizenship.

As the US Supreme Court seeks to bend the constitution to the will of plutocrats, the peril is to the politically egalitarian premises of the republic. Enormous divergences in wealth and power have hollowed out republics before now. They could well do so in our age.

Yet even for those who do not share such concerns, the economic costs should matter. The “secular stagnation” in demand, to which Lawrence Summers, the former US Treasury secretary, has referred, is related to shifts in the distribution of income.

Equally, the transmission of educational disadvantages across the generations is also a growing handicap to the economy. A debt-addicted economy with stagnant levels of education is likely to fare ill in future.

What Should We Expect From Our Stock Investments?

investment-tipsMy Comments: Lots of questions about the markets these days. I came across this short summary and thought it relevant. I didn’t understand the chart until after I finished reading, so be warned. I’m in a very cautious mode and have my clients positioned to avoid large losses and perhaps make money as things go down.

The intent here is to give you an idea about the future, one that includes a major correction. If you are willing to accept some serious pain in the short term, the current number from which to make a judgement is 26.3. Find that on the chart and you have an idea what the future holds in the medium turn, that is if you think 5 -10 years is medium. ( I once knew someone who traded currencies, and for him, a medium term hold was 48 hours! )

Brad McMillan , Oct. 2, 2014

With the market recently bouncing off all-time highs, it seems like a good time to consider what the future holds.

Are we poised for more of a run-up over the next several years, or is the market likely to disappoint in its returns?

The answer very probably depends on the timeframe we look at. Over one year, it’s anybody’s guess. Over three to five years, we can probably make a reasonable estimation. And over ten years, we likely have a pretty good idea. Let’s take a look at what history tells us about returns going forward.

Selecting a valuation indicator
How do we characterize today’s market environment in relation to past market environments? There are several ways to measure the market, but the best revolve around valuation. How we measure valuation can make a significant difference in the results we get. A good indicator of market value should have a meaningful relationship with future returns. If not, what’s the point?

Looking at the correlation between different valuation measures and future returns, a couple of things stand out:
• Forward price-earnings ratios have a relatively poor correlation with future returns.
• Trailing price-earnings ratios have a fairly strong relationship with future returns. This makes sense, as the trailing P/E ratio reflects actual rather than expected performance.

The valuation indicator that has the best correlation with future returns, however, is the Shiller price-earnings ratio. It’s my preferred metric for several reasons, and the actual numbers bear it out. If you’re looking to estimate returns over 5 to 10 years, the Shiller P/E is the best indicator to use.

So, what does the Shiller P/E tell us about future returns? Here’s what we can expect returns to be going forward, using the Shiller P/E as an indicator.
Shiller PE
This chart comes from an older study I did, but the numbers are still reasonably accurate. The main point is that the more expensive the market is, the lower future returns are likely to be.

With the current level at 26.3, per Shiller’s website, we can see that over the next five years, based on history, the average return may be in the 5 percent range, while the likely 10-year return may be in the 7.5 percent range.

Not too shabby, actually. As a basis for planning, this analysis constrains what we might hope for, but it doesn’t look all that bad, either.

There are other factors to consider, of course. Averages can conceal a multitude of sins, so tomorrow we’ll look at the data in more detail to see what else we can divine about future stock returns.

J.P. Morgan Weekly Market Recap – October 6, 2014

Here is the most recent Weekly Market Recap from J. P. Morgan and Co. It’s a great summary of what is going on to help you make better decisions about your investments. Click on the following image and you’ll find yourself at a JPMorgan webpage to download it and read at your convenience.

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Smart Retirement Income Strategies

retirement-exit-2My Comments: This comes from the staff at Financial Planning, a well known magazine that appears monthly and is subscribed to by financial professionals. It contains valuable information for anyone soon to be retired or even already retired. These are summaries and if you want to read the full article, reach out to me and I’ll help.

Financial Planning Staff / SEP 17, 2014

Clients worried about longevity, unknown health care costs and a persistent low-yield environment are increasingly turning to their advisors for solutions. As they near retirement, many are eager to address their future cash-flow needs. Based on our reporting, here are some of the best ways advisors can help clients generate income in retirement.

Delaying Benefits to Avoid ‘Tax Torpedo’ on Social Security

Many people who need retirement income in their 60s claim Social Security then, supplementing those benefits with IRA withdrawals if necessary, according to Mark Lumia, CEO of True Wealth Group in Lady Lake, Fla.

A double tax on Social Security benefits and IRA withdrawals has been called the tax torpedo; to reverse the process, seniors can delay Social Security until age 70 while using IRA funds for spending money until then. The later a client starts Social Security the larger the benefit will be, so smaller IRA withdrawals can generate the total required for retirement income.

“The formula for determining the tax on Social Security benefits includes IRA distributions in full but only half of Social Security benefits,” says Lumia. Thus, increasing Social Security by waiting until age 70 and consequently reducing the desired IRA withdrawals can dramatically lower the tax on Social Security benefits.

Lumia calculates that a retired couple with $97,000 of income ($70,411 in Social Security after delaying benefits to age 70 plus $26,589 from their IRA) would owe $6,492 less in federal income tax than a retired couple with the same $97,000 income receiving $40,006 in Social Security benefits after starting early plus $56,994 in IRA distributions. Over an extended retirement, such tax savings can be substantial.

When It Pays to Recharacterize a Roth Conversion

Tax-free Roth IRA distributions can be a valued source of retirement income; withdrawals are completely untaxed after age 59-1/2, assuming the account is at least five years old. However, building up a Roth IRA recently hit a snag thanks to the Affordable Care Act. “For some clients, dealing with the Affordable Care Act (ACA) exchanges adds another dimension to Roth IRA conversions,” says Marty James, a CPA/PFS who heads an investment and tax management firm in Mooresville, Ind. “Lost health insurance tax credits can increase the effective cost of the conversion.”

A Roth IRA conversion creates more taxable income. Higher income, in turn, might cost certain clients health insurance discounts, adding sharply to the premiums they’ll have to pay. One possibility is recharacterizing the Roth IRA conversion back to a traditional IRA which will wipe out the associated increase in health insurance costs.

“We’ll also look at investing in an oil and gas program that provides first-year deductions, to offset some of the increased income,” says James. In any case, it’s likely that this couple will postpone or sharply reduce Roth IRA conversions until they reach age 65 and become eligible for Medicare.

Rethinking the 4% Rule
By now, most advisors have gotten the memo: the long-held conventional wisdom about 4% annual withdrawals from retirement accounts no longer reigns supreme in the face of longevity projections and predicted long-term stock market returns.

“I have got 25 years of experience” and “my average client is nearly 60 years old,” says Roger Kruse, who owns FFP Wealth Management, a Minneapolis-based firm. With that kind of time helping clients, many of whom who have lived out most of their retirement years, he has come to recognize that –and “this is incredibly obvious,” Kruse says, “People spend less money as they age.” Why? “You travel less, you drive less and your out-of-pocket spending decreases,” Kruse says.

Looking to Dividend Stocks
When trying to help clients generate income in retirement, advisors may want to shift their focus from domestic stocks.

“We believe that that the lion’s share of a client’s equity holdings should be in large, cash-rich multinational companies,” says Greg Sarian of the Sarian Group at HighTower Advisors, a wealth management firm in Wayne, Pa. “We are in the mature stage of the economic cycle, so large-cap stocks may have better prospects now than small- or mid-caps.”

The tax tail shouldn’t wag the investment dog, as the saying goes, and Sarian sees much more than low tax taxes to like about dividend-paying stocks these days. “Dividends are increasing at many companies,” he says, and that may continue to be the case.

Writing Covered Calls
Does implementing a covered call strategy make sense as a way to provide some income for retired clients?

“Absolutely,” says Nick Defenthaler, a planner at the Southfield, Mich.-based Center for Financial Planning, “But it’s important to point out that although writing covered calls for income is certainly one of the most conservative option strategies, it still contains risk. The premiums received are guaranteed upon writing the call but the underlying stock could plummet and lose substantial value during the contract period.”

Defenthaler favors writing calls on a stock that has appreciated in value and the client is willing to sell. “Why not write some options for additional income?” he asks. “If the stock gets called away, profit was still realized and income was also generated. The client, however, must be aware of and comfortable with the possibility of the underlying stock losing value during the option’s contract period.”

Combating Inflation
Partly because of continued growth in the U.S. economy coupled with the winding down of the Federal Reserve’s bond-buying program, the risks of continued low inflation are diminishing.

Widely followed Rick Kahler, president of the Kahler Financial Group in Rapid City, S.D., is telling clients it’s necessary to maintain exposure to asset classes that can outpace inflation in the long-term when interest rates rise –including equities.

“Retirement isn’t a time to pull back and load up on fixed-income investments and immediate annuities,” says Kahler. “Our clients’ investment portfolios need to recognize that inflation is built into our flat monetary system.”

Boosting Revenue With Real Estate Income?
Warning signs flash in most advisors’ eyes when retired clients enter their office with visions of creating extra income streams from real estate ventures.However, not all advisors feel that way.

Rich Arzaga, the founder and CEO of Cornerstone Wealth Management in San Ramon, Calif., embraces real estate investments for his retired clients.

“I think there is real opportunity to help these people out,” says Arzaga who teaches a course in real estate and financial planning at University of California, Santa Cruz. Other advisors say “no” to clients’ proposed real estate investments because the advisors “don’t know that asset class.” But, he says, “It’s a real disservice to clients.”

He does warn his retired clients to treat real estate investments, “like a business.” What does that mean? “Don’t fall in love with the property or the tenant,” he says.

Seeking Alternatives to Energy MLPs
For retirees, distributions from master limited partnerships have obvious appeal.
Thanks to rules set by Congress intending to attract long-term investors — rather than speculators — to pay for finding new sources of energy exploration and production, MLPs have the advantage that they don’t pay corporate income tax. As such, they act as “pass-through” entities, passing profits to investors in quarterly distributions.

But Judith McGee, who serves as chairwoman and chief executive of McGee Wealth Management, in Portland, Ore., an affiliate of Raymond James Financial Services, and other financial advisors dislike energy MLPs because of their illiquidity. “I’ve seen people really get stuck with these,” says McGee.

To have the investments perform at their highest rate of possible return and tax advantages, clients typically have to commit to keeping their stake in the MLPs for decades.
If her clients want a piece of the booming gas and oil discovery market, McGee prefers other energy investments, if those don’t pay the quarterly dividends. “There is a better way to play this. There are so many other options,” McGee says. She suggests some of the mutual funds that focus on natural gas pipeline investments or publicly traded energy companies. “Anytime one of my retired clients gets into something they can’t get out of quickly, I get worried,” she says.

Refining Bucket Strategies
If there’s a common denominator among bucket strategies in retirement planning, it’s the use of a sizable cash bucket. “We like to see retired clients with at least a year’s worth of needed funds in cash equivalents such as money market funds,” says Eric Meermann, client service manager with Palisades Hudson Financial Group in Scarsdale, N.Y.

Often, this mode of retirement planning groups a client’s other assets into fixed income and equity buckets. As the cash bucket is depleted, it might be replenished from the fixed income bucket, which in turn will be refilled from the equities bucket.

Other tactics could include using bond redemptions, interest income, stock dividends, or proceeds from capital losses to keep the cash bucket topped up. In any case, a bucket strategy for drawing down retirees’ investment assets needs a plan for refilling the cash bucket.

“In the drawdown phase, we use a client’s asset allocation to determine how to move money into cash,” says Meerman. “In 2008-2009,” he says, “when stocks fell sharply, our allocations became tilted towards fixed income. At that point, we wouldn’t use money from equities to restore a retiree’s cash position.” Instead, the firm rebalanced clients’ allocations, moving money from fixed income into equities, and retirees’ cash positions were refilled from fixed income rather than from equities.

And while clients’ asset allocations don’t typically vary as they go through retirement, there is still “some flexibility with these plans,” Meerman says. “If there’s a significant decline in a client’s wealth, perhaps in a bear market, we might suggest spending less, which would mean taking less from the portfolio.”

Shoeshine Boys and Thinking At The Margin

My Comments: When the last crunch time came in 2008 and 2009, I vowed to find a better solution for my clients. The idea of losing 30% or more of the value of your retirement holdings over the course of a few months is devastating. For many, it’s taken years to get back to where they were.

What I found was an investment manager in Tacoma, Washington, that takes what is called a tactical approach to managing money rather than a strategic approach. The strategic approach still works for pension funds, insurance companies and foundations. They know they are in for the long haul, and that if they own good companies and safe bonds, if they are down today they will be up tomorrow. Only their tomorrow can be several years down the road.

For many of us, tomorrow is just that. Or perhaps next month or maybe next year. In the meantime we have to be able to sleep at night. This requires an approach to investing that allows us to be in cash overnight, with a possibility of going short if the signals tell us that a downward trend is upon us.

The dilemma I face as an advisor is that taking this approach means that you don’t capture all the upside, and clients are critical as they feel they are missing out on some of the historic upswing. I try to tell them it won’t last, but some of them don’t believe me. But I’ve been posting articles lately that suggest a reversal is soon to come. These comments by Joseph Calhoun bear me out. If you are worried about your circumstances, give me a call, and I’ll try and share with you what I think is likely to work in your favor.

Joseph Calhoun / Sep. 29, 2014

It is said that Joe Kennedy got out of the stock market in 1929 because he started to hear stock tips from his shoeshine boy. Bernard Baruch had similar feelings: When beggars and shoeshine boys, barbers and beauticians can tell you how to get rich it is time to remind yourself that there is no more dangerous illusion than the belief that one can get something for nothing.

What Baruch was pointing out was that the marginal buyer of stocks – the shoeshine boy – really didn’t know much about the markets and was most likely buying for reasons that had little to do with the underlying fundamentals. The shoeshine boy was buying because the market was going up and he saw it as an opportunity to get rich and stop shining the shoes of Bernard Baruch and Joe Kennedy. He was buying not because he believed the economy would perform well in the future or because he had some deep understanding of the fundamentals of the companies in which he was buying stock. He was buying because everyone else was doing it and getting rich and he wanted to claim his piece of the profits.

I have said many times that the economy is not the market and the market is not the economy. What I mean by that is that current stock prices are not just a reflection of the current economic data but also incorporate a view of the future economy. It is only in the future that you will find out whether that view of the future as captured in stock prices is correct. But whose view of the future economy? In 1929, for Bernard Baruch and Joe Kennedy, it was the marginal buyer, the shoeshine boy’s view of the future that was moving prices. And they were uncomfortable staking their fortunes on the views of the shoeshine boy or the barber or the beautician. So when I look at markets – any market – I always try to think through who the marginal buyer is, who is moving prices.

You don’t see shoeshine boys much anymore so we can’t just go down for a shine and ask him about his views on the market or the economy. But it is still possible, to some degree, to suss out who the marginal buyer is and judge whether you want to risk your capital on their opinion of the world. I remember reading an article in the Miami Herald in about 2006 that showed pictures of people camping out in a tropical storm for the chance to purchase a pre-construction condo.

Those were the people driving up the price of housing and that’s when I knew there was something seriously wrong with the housing market and that it probably wouldn’t end well. Normally rational people had seemingly lost their minds in pursuit of riches in the condo market.
They were the shoeshine boys.

I had similar feelings about stock buyers in the late ’90s when there were numerous articles about people quitting their day jobs to day trade full time. For me that brought back memories of an old trader who told me early in my career that one “shouldn’t bet the milk money on the markets.” Of course, just because the shoeshine boy is buying stocks that doesn’t mean that they are due for a fall. There may be a supply of shoeshine boys or day traders who have yet to commit their milk money to the market. It isn’t until the market runs out of shoeshine boys or to put it in the modern lexicon greater fools that the market will shift.

All markets are about the tug of war between bulls and bears and it is the marginal participant that makes the difference. If the market is in equilibrium and the bulls on one end of the rope can coax a bear to come over to their side, the market will rise. If a bull pulls a muscle, the market rope may move toward the bears. It doesn’t take all the bears or bulls to go to one side, only a sufficient number – enough at the margin – to tip the scales. And the rope will continue to move in the direction it is going until a sufficient number of rope pullers, bears or bulls, switch sides and a new equilibrium is reached at a new price.

I don’t think we are at the shoeshine boy level in the stock market just yet, but we do seem to be moving in that direction. The group on the sellers end of the rope over the last 18 months are private equity firms, venture capital firms and corporate insiders. The buyers end of the rope is populated by individuals, companies buying back their own stock and that of other companies (takeovers). The question you have to ask yourself is which team you want to be on; who do you want your teammates to be? The buyers have a poor long-term track record while the sellers are a pretty savvy group overall. Do you trust the companies buying back their own stock with company money or the insiders exchanging their own stock for cash? Whose view of the future is likely to be correct? The venture capital firms shoveling out IPOs at a pace second only to the peak of the dot com mania? Or the people scrambling to get in on the latest hot IPO with dreams of Alibaba riches in their heads?

We should also consider the divergent views of the bond and stock markets. The bond market shows high yield spreads widening, inflation and growth expectations falling and the long end of the yield curve flattening to levels last seen in the early months of 2009. That is a fairly bleak view of the future. The stock market would seem to be predicting the opposite, an acceleration in growth and profits that justifies paying above average multiples for stocks. It seems unlikely that both markets can be right but we don’t know yet which one has the correct view of the future. It may be that as the biggest marginal buyer of bonds – the Fed – stops buying that the bond market will shift to mirror the view of the stock market. But with the Fed reducing bond purchases all year and the bond market rising anyway, it appears there are still sufficient buyers at the margin to replace the demand of the Fed.

One warning sign for both stock and bond investors is the recent rise in volatility. It started first in the currency markets and is now starting to move to stocks and bonds. Volatility is essentially the opposite of liquidity so the rise in volatility is a warning that liquidity is drying up as the Fed ends QE. That is consistent with what we saw at the end of previous periods of QE and the view that tapering is indeed tightening and those trying to time the first rate hike are concentrating on the wrong thing. We won’t have to wait long to find out as the Fed will end their bond and mortgage purchasing next month.

Who will win the tug of war in the bond and stock markets? I don’t know of course since I can’t see the future. But like Bernard Baruch and Joe Kennedy, the marginal buyer of stocks right now makes me uncomfortable. Greed is the dominant theme of these buyers with FOMO (fear of missing out) driving their purchases. It may be that the bulls can continue to coax more bears to the bull side of the tug of war but the bear side of the rope is getting pretty thin. Did you ever see what happens when one side in a tug of war gives up?

“Are We There Yet?”

108679-bruegel-wedding-dance-outsideAs a parent, I remember this question well from days past. This time, however, it’s being asked by those of us with money invested in the global stock and bond markets.

All of us are following a life path that includes stops along the way. Some stops we choose to make and others are forced on us. Some of them are in good places and others not so good places. These comments talk about a bad one on the horizon and how your life might be better if you don’t have to stop.

Sometime soon, most likely in the next three 3 years, many of us will hit a road block. With that in mind, what follows is designed to help the reader gain a better understanding about how to have money positioned before that happens. This is particularly important if you are soon to be, or are already, retired.

In retirement, your investment focus will shift away from the accumulation of money and focus instead on the distribution of money. That’s not to say your money will no longer accumulate, but the emphasis will change. This is because instead of you working FOR money, money now has to work for YOU.

None of us individually has any control over the markets. What we do have is control over where and how our money is working for us. For almost everyone, the rules that define successful accumulation are different from the rules that define successful distribution.

Two primary drivers that define success in either phase are the stock market and the bond market, which is driven by interest rates. Knowing more about why this is relevant is in your best interest. You will also find it’s in your best interest to avoid the coming road block if you can.

Let’s first look at interest rates. Following this paragraph is a chart that shows the general level of interest rates in the U.S. over the past 222 years. In that entire time, you see four high points in green and low points in orange. The time span from high points to low points has been 27 years, 37 years and 26 years. The last high point was in 1981, 34 years ago. What this suggests to me is that with current interest rates near zero, an upturn in rates is going to happen. How soon is up for debate, but inevitable.
200+year interest ratesWhen interest rates rise, the effect on bond values is negative. No one is going to pay you as much for a bond that yields 4%, if with the same money they can buy a bond that yields 5%. This is a fundamental law of finance. Before the shift happens, you should be out of bonds and into cash or into tactical approaches that help you avoid losses.

Let’s now look at the stock market. Instead of individual stocks, I’m going to focus on the S&P500 Index, widely regarded as representing the entire US stock market. It includes the 500 largest capitalized companies in the US, many of whom sell globally, so their performance to some degree reflects what is happening across the planet.

The next chart reflects the closing price of the S&P500 on every given trading day over the past 40 years. These years largely reflect how the dollars you had invested in the stock market performed as it accumulated. Your goal at the time was to grow your pile of money as large as reasonably possible.

Retirement was down the road, and if a road block happened, it didn’t matter so much. What you heard everywhere was “buy and hold” or “hang in there”. But now the rules are different and the big question you must ask is “When Will The Next Downturn Happen?”. Or perhaps “Are We There Yet?”.

1974-2013 SP500From 1975 -1982, the rise was imperceptible. Then it started upward and in spite of what happened in 1987, it was a lot of fun. Then came the internet bubble that burst in early 2000 and we all experienced the pain associated with large declines in our account values.

Next came the mortgage bubble that burst in 2008-2009. Again there was a lot of pain and some of us are still recovering from that episode. For the past 3 years we’ve been watching what appears to be an inexorable climb up above previous historic highs.

I try to avoid promoting a sense of fear. However, there seems to be an inevitability about the fact that sometime, most likely in the next few years, there is going to be another bubble. Again there will be widespread pain and fear and gloom across the country, if not the entire planet. Perhaps a better question to ask is “Are You Ready For It?” Or maybe “When it Happens, Will You Be Able to Sleep At Night?”

My point is to cause you to evaluate or re-evaluate what you are doing now and consider options that will eliminate some of the pain that is sure to come, and to consider options that might even cause your accounts to grow.

While all of this is speculative, it is based on historical experience. And unless you plan to be dead in a few months, how all this plays out could dramatically influence your peace of mind and financial freedom in the years to come. Not to mention the financial freedom of those you leave behind.

All of us have different pain thresholds. The more money we have compared to our accepted standard of living, the less likely the pain. What you choose to do with your life in retirement, however, is up to you.

If you take appropriate steps to protect yourself, then chances of a succesful retirement from a financial perspective are better. Living a life free from fear about your financial future is possible.

It’s up to you what you do. But I encourage you to believe acting sooner rather than later will be in your best interest.

(The charts were found at finance.yahoo.com)

by Tony Kendzior, CLU, ChFC / October 1, 2014

 

 

 

 

A Crisis Less Extraordinary

080519_USEconomy1My Comments: For those of you who can stomach economics and the sometimes arcane language of investments, this is an interesting analysis. It comes from a source called Seeking Alpha where I have a membership. Their articles are also infused with lots of charts which I often choose to leave out.

So if for any reason you cannot get to their site to continue reading and see all the accompanying charts, let me know and I’ll forward to you a PDF file with the full article. All this is to help you get ready for the next downturn which will happen.

Eric Parnell, CFA, Gerring Capital Management Aug. 14, 2014

Summary
• It is often said that the financial crisis that was unleashed from July 2007 to March 2009 was a once in a century event.
• But upon closer examination, the market shock resulting from the financial crisis was not all that extraordinary.
• In fact, it was rather modest in many ways when compared to other major historical bear markets.
• And this fact alone may be setting investors up for a far more challenging bear market experience the next time around.

It is often said that the financial crisis that was unleashed from July 2007 to March 2009 was a once in a century event. Some investors even take comfort in this notion with the belief that any future stock bear markets will almost certainly pale in comparison. In short, if one could survive the financial crisis, one can certainly weather what may come in the future. But upon closer examination, the market shock resulting from the financial crisis was not all that extraordinary. In fact, it was rather modest in many ways when compared to other major historical bear markets. Instead, the only thing that has been truly extraordinary this time around has been the policy response. And this fact alone may be setting investors up for a far more challenging bear market experience the next time around.

Second Worst Bear Market In The New Millennium

The bear market sparked by the financial crisis was not even the worst bear market we have experienced since the calendar flipped into the new millennium. In many respects, the bear market associated with the bursting of the technology bubble was worse. This is due to the fact that the magnitude of the decline during both bear markets was effectively the same. But stocks (NYSEARCA:SPY) reached the bottom of the financial crisis bear market in a little less than half the time at 412 trading days by March 2009 versus the more than 700 trading days before stocks reached their final post tech bubble bottom in March 2003.

2000 VS 2008Now some might say that what made the financial crisis bear market worse was the sharp magnitude of the declines from October 2008 to March 2009. To this I say nonsense. These two past bear markets moved in complete lockstep for the first 300 trading days. It was not until policy makers allowed Lehman Brothers to fail when the financial crisis bear market deviated to the downside. But the net effect of this outcome was the stock market equivalent of ripping the band-aid off quickly instead of slowly. In short, the Lehman failure delivered stock investors to the bottom much more quickly, which many could argue ended up being a great advantage. For even if policy makers helped rescue Lehman the same way they saved Bear Sterns six months earlier, it still would not have alleviated the rotting mortgage debt problem that was festering in the financial system at the time. Instead, the stock market likely would have continued dying a slow and painful death into the summer of 2010 if not longer. And since policy makers seemingly felt like they screwed up by letting Lehman fail, they have been overcompensating ever since by printing trillions of new currency to support the stock market and the economy, the latter of which has been in vain.

Verdict: Bursting of the tech bubble was worse than the financial crisis for investors.

Great Depression Markets Much Worse

The bear market during the financial crisis was also mild when compared to those during the Great Depression. When matched up against the bear market from 1929 to 1932, the financial crisis market was relatively mild in comparison until the very end and was not even able to catch up to the pace of the Great Depression bear market at its darkest moments. And while the financial crisis bear market ended after 412 trading days, the Great Depression bear market lower for a few more years before finally ended down nearly -90% on a price basis.

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